When it comes to buying a home, a mortgage is almost always a part of the process. But as common as they are, mortgages can often be highly confusing. That said, it’s in your best interests to become familiar with the mortgage process, regardless of whether you’re a first-time buyer or have bought and sold many times in the past.
The first thing to do to solidify a mortgage is submit an application with your lender to get pre-approved for a home loan. This pre-approval is based on your credit score, so your lender will pull your credit report to check out your financial history and see if there are any issues that would stand in the way of mortgage approval. While lenders each have their own unique set of required qualifications, the majority will want to make sure borrowers have a score of at least 660 or higher.
Your lender will verify all the requested documents, which typically include paystubs, bank statements, an employment letter, and W2’s, among others. It’s recommended that you submit all these documents along with your application to help speed up the home loan process.
If all goes well, you should be granted a mortgage pre-approval, which is basically a letter that details the type of mortgage that you’re qualified for and the amount you are eligible to borrow. This will help you narrow down the price range of homes to look at, and will also come in handy when it comes time to submit an offer to a seller.
It should be noted that a pre-approval is not the same as approval for a mortgage. The mortgage approval process can only take place after your offer on a home has been accepted by the seller. A pre-approval does not guarantee that you will be approved for a mortgage, though it is certainly a step in the right direction.
Lock in Your Mortgage Rate
Obviously, the lower the interest rate, the more affordable your home loan will be. Ideally, you’ll want to lock in a rate when it’s low, as the rate can fluctuate from one day to the next. Just because you are quoted a specific interest rate one day doesn’t necessarily mean that it won’t change by the time you are approved for a mortgage.
To make that you get the rate you were quoted, you can lock it in. Of course, if you think the rate will go down by the time your mortgage is approved, you can choose not to lock it in and wait it out.
Apply For Your Mortgage After Offer Acceptance
Once your offer has been accepted by the seller, the real mortgage approval process begins. This is much more involved and detailed than the pre-approval. The mortgage application form requires details about you and the home you agreed to purchase, and also requires personal finance documentation.
Your lender will carefully assess your finances to verify your employment status, income, assets, and debt. The home itself will also be evaluated, and an appraisal will be ordered by your lender to make sure that it’s market value is eligible to be financed. Appraisals are performed by an appointed real estate appraiser who is qualified to conduct such evaluations.
Ideally, the home should be appraised at around the price you agreed to pay for it in order to secure financing. Should it come in low, your lender may not agree to approve you for the loan amount you originally requested. In this case, you can either renegotiate with the seller for a lower price or try to come up with the liquid cash to bridge the gap.
Your Debt-to-Income Ratio Plays a Key Role
During the mortgage approval process, your lender will carefully assess your debt-to-income ratio, which compares how much debt you have to your income. This number is a critical measure of your ability to make your mortgage payments in full and on time each month, and ideally shouldn’t be any higher than 36%. If it’s any more than that, it will be hard for you to keep up with your mortgage payments – as well as all your other debt obligations. Not only is this risky for you, it’s risky for your lender too.
Final Mortgage Approval
After your home loan is approved, you will typically be issued a conditional approval which outlines any conditions that you need to meet before receiving an actual loan commitment, such as a home inspection report.
You’ll be given a Loan Estimate (LE) during the application process that details the closing costs associated with the mortgage. Your lender is legally required to provide the Loan Estimate within 3 business days of your home loan application submission to give you enough time to review the document and approve it.
The mortgage documents are then sent to a title company’s office for you and the seller to sign, and your closing costs and down payment will be due at this time. After all necessary funds have been collected and the seller receives the appropriate proceeds from the sale, the title of the property is then transferred to you and you’ll now be a new a homeowner!
The Bottom Line
As you can see, there are plenty of steps that go on behind the scenes after you’ve submitted all the necessary paperwork to get the mortgage process ball rolling. Luckily, your mortgage broker and real estate agent will be there every step of the way filling you in on the process and guiding you in terms of the next steps to take. Once the process has been completed, it’s time to celebrate! Finding the home of your dreams is one thing, but finally getting mortgage approval is another huge milestone. When it’s all said and done, you can finally start enjoying life in your new home.